Tracking and reporting investments with dividends correctly

Unknown · July 2017

I get it, Tom. My point about the formula being approximate still stands. Solving for NPV when trying to evaluate an investment also leaves a lot out and, since it is a projection from uncertain future points in time, the formula relies on hypothetical interest rates and hypothetical, projected future cash flows.

Bob_L · July 2017

In the context of this discussion, there is nothing "hypothetical" about the cash flows. They are actual cash flows and market values based on the time period selected. There are also no hypothetical interest rates involved as the interest rate is in fact what is solved for.

Unknown · July 2017

I didn't suggest there was anything hypothetical in the cash flows in the Quicken IRR calculations, just that they leave out some of the information on reinvestments by not including them in the cash flow analysis--they are only included in the ending yearly values, It is still only an equation that models returns and gives different returns than some other eguations' modelings of IRR and different than the modeling given by ROI calculations that are reported as year-over-year compounded rates of return as in Quicken's Percent Return. The zeroing out of reinvestments does not list or compute the transactions that zero out, so it doesn't include their timing or cost. There are discrepancies in the various approaches as everybody in the world and on this thread has acknowledged, so they give us relative accuracy that is useful in understanding our portfolios' returns, and they are practically quite similar and not different enough to be especially concerning. However, they do not give an absolutely certain representation of reality. The year-over-year average compounded rate of return doesn't completely reflect sequencing of returns anyway since it is an average (it needs to be broken down in the performance report by year or month to 'see' the sequence of returns), and in both portfolios and in individual securities, the sequencing of returns matters even if the IRR is the same for various reasons (taking returns, taxes, amount invested when the returns occur, and so on and so on).

So, the different math and breakdowns give us views of the reality of our returns, but are always incomplete representations, and they vary in what they tell us. That's my conclusion/story, the more I look into this the more it is confirmed, and I'm sticking with it.

q_lurker · July 2017

They are not leaving anything out. There is no cash flow associated with the reinivestments, or if you prefer, there are two cash flows, one positive and one negative on the same day in the same amount. Look at the equation you took from the help files. Two equal and opposite cf values on the same day are not going to affect the summation. The process is going to yield the same "r" rate of return.

Secondly, you are taking the comment in that help info about Amount Invested and applying it to Average Annual Return. That doesn't fly. Quicken's note are not saying reinvested dividends are not included in the IIR (Average Annual Return). The notes are saying Amount Invested does not include reinvestments.

Thirdly, you seem bothered that Quicken's IRR does not match Quicken's Return% or ROI%. They are not the same and it is easy to have them not on an apples to apples comparison. See this 5-year old post for some comparisons -- https://getsatisfaction.com/quickencommunity/topics/investment-performance-a-how-to-reposted-in-read...

For simple cases and the correct timing, as shown in the cited discussion ROI and IRR may come out the same. For the general case, they will not. But this difference is not because IRR neglects reinvestments.

On that point, I think we can agree, though I would state they are "different representations" rather than "incomplete representations". They all certainly do vary in what they tell us. Indeed, there is not one "value" to represent our investment returns. The objective should be to make comparisons on a level playing field with a common and balanced approach.

Unknown · July 2017

Dear q.lurker:

I do appreciated your persistence on this and see that I am wrong on an absolute basis. I think my brain has difficulty with double entries--credit and debit in double entry accounting, investment and return in this case--that represent the same money and zero out. It doesn't happen when it is a return that is transferred and deposited as investment to another account in a portfolio on the same day; I guess that is so the formula represents the different accounts accurately. In any case, this exploration has left me more aware of the metrics and more likely to look at returns from different angles and to make multiple sorts of comparisons so that, as you state, "the objective should be to make comparisons on a level playing field with a common and balanced approach." I don't care if my bathroom scale is as accurate as displacing water with my body; I just want it to be reliable in its variability and fairly close to more precise measures (I do understand that the accuracy is not in question in the case under discussion, just that it equates to the yearly compounded interest rate we would have to make on an interest bearing account). So, I accept your reasoned and reasonable argument, and thank you for your contribution.

q_lurker · July 2017

@Brian Mahon: You are quite welcome. It can be hard to get ones brain around all the nuances. One step that helped me do so was to export Investment Performance Reports to Excel, and there do some manipulation and use their XIRR function. Apples to apples, it gave the same values as Quicken (+/- 0.01%) but more importantly I could see the effects of dates and individual transactions on the bottom line IRR value.

I've also just now done some cross checking with one security I have in multiple accounts. In most accounts, it is a pretty pure buy and hold with dividends, etc. reinvested. In one account, I take dividends as cash and have done some selling. In another, I have added to the position, slightly.

The fund opened 2016 at 50.79, closed that year at 56.08 and closed today at 61.95. That make the price change for 2016 10.4% and for this year 10.5%. Looking at AAR values for 2016, for those bought-hold-reinvest accounts, the AAR for 2016 was 12.63% and for 2017 (1/1 through 12/31) 11.48%. That 2.2% betterment in 2016 and 1% in 2017 represents the effect of the dividends -- about right for that type of fund.

But here is perhaps an oddity -- In the account where I added to the holding and reinvested, the AAR was slightly better in 2016 (12.67% vs 12.63%) but slightly worse with 2017 values (11.42% vs 11.48%). Conversely, the account where I have sold off shares (and took cash dividends) did worse in 2016 (12.50% vs 12.63%) and better in 2017 (12.10% vs 11.48%). Likely a matter of actual timing and and actual pricing.

I also did a 6-month comparison of the Cash Dividend account vs the reinvested dividend account. In that period there were no buys or sells of securities; it became a pure comparison of Reinvested vs cash dividend as processed through the IRR calculation. Results -- 17.98 AAR for the reinvested accounts, 18.01% AAR for the cash dividend account. Surprised? In this case, I think the difference was that the December reinvestment was made at $56.63/sh and the security closed at 56.08 for the year. So that final reinvestment amount ended up at a slight loss. Choose different dates and the numbers can tweak the other way. FWIW: The price change for the 6-month period was +7.22% and the dividend yield was about 1.14%.

Unknown · July 2017

Thanks for the follow-up. The calculations you cite above are helpful in seeing that the share transaction on reinvested dividends does get the timing and price right in your 'surprise' case that did not surprise me but is confirming that the Quicken calculations are complete on this issue. This post also is encouraging me to become at least semi-literate with Excel.

Unknown · July 2017

A comment on what I notice with different ways that dividends are downloaded. Some dividends download to my Fidelity Quicken account as Reinvested Dividends in one transaction. Others download as two transactions with a dividend (sometimes it may be two or three lines of dividends) coupled with a Bought transaction. Both transactions have the same effect on share balance. However the Reinvested dividend transaction does not show up in the Amount Invested column so I feel I have an accurate view of the amount earned on the investment (ie. present value minus what I originally put in as cash), as opposed to the multi line transactions where the reinvested dividends show up as added to my original investment to give an invested amount that includes my cash in, as well as the dividends paid. To get an accurate view of performance (by my preference) I usually delete the multi line items and change the Bought transaction to a Reinvested dividend. This gives me what I want to see.

Tracking and reporting investments with dividends correctly

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